Non-Compete Agreements

Protecting a Company’s Legitimate Interests When Employees Leave

The days of a person going to work right out of high school or college and remaining with the same employer until retirement are gone. Change in the economy and in the way in which business is conducted in today’s global marketplace have created a mobile workforce in which a worker retiring after 30 or more years with the same employer is a rarity. The fact that employees come and go has increased employer concerns about protecting trade secrets and other proprietary data and property that employees might take with them when they leave.

Non-compete agreements protect proprietary property

Most states have long-recognized the right of a business to protect its trade secrets, customer lists and other property or data of a proprietary nature from its competitors. One method employers have relied upon to accomplish this has been a noncompete agreement.

A non-compete agreement, also referred to as a “covenant not to compete,” is a contract between an employer and employees. The agreement prohibits workers with access to a company’s trade secrets, customer lists and other proprietary data or property from working for a competitor with whom he or she could share or use the confidential information to give their new employer a competitive advantage.

Requirements for an enforceable non-compete agreement

The laws pertaining to the creation of a legally enforceable noncompete agreement differ from state to state, but most states require the agreements to meet the following general guidelines:

Legitimate business interest: There must be a legitimate business interest that the employer needs to protect with the agreement. Courts asked to enforce these agreements want proof that the employee had access to confidential information that could give an unfair advantage to competitors if the employee was allowed to reveal it.

Consideration: Because they are contracts between an employee and his or her employer, covenants not to compete require consideration or something of value being exchanged. For example, the consideration for the signing of an agreement not to compete by a new by new employees would be the offer of a job. Consideration given to existing employees asked to sign non-compete agreements might take the form of a pay raise, a one-time bonus or something else of value.

Reasonableness: Agreements restricting employees from going to work for a competitor in order to prevent them from sharing confidential information must be reasonable as far as time and distance. What is reasonable largely depends upon the nature of the confidential information, the harm that might come to the employer if the information is revealed and the extent of the limitation it places on the employee’s ability to earn a living.

The use of non-compete agreements is permitted in the majority of states throughout the country. California, however, has adopted a dramatically different approach to their use.

The California rule on restrictive covenants leaves door open to nondisclosure agreements

Business owners in San Diego or other locations within California who might consider using a noncompete agreement to protect their proprietary property and information could be in violation of state law. The California Business and Professions Code prohibits the use of contracts restricting the ability of a worker to engage in any lawful business, trade or profession.

The statute reflects the state’s policy of favoring the mobility of the workforce and free and open competition. There are three exceptions to the prohibition against noncompete agreements:

The seller of a business agreeing not to compete against the new owner for a specified time following the sale

Departing partners agreeing not to compete against the partnership

Departing members of a limited liability company can be prohibited from competing with the LLC

California’s limits on covenants not to compete do not prohibit employers from enforcing nondisclosure agreements. A nondisclosure agreement limits the ability of an employee from using trade secrets and other confidential information obtained from a former employer. An employee with access to trade secrets or other proprietary information could go to work for a competitor and not be in violation of a nondisclosure agreement. The agreement would only prohibit the former employee from disclosing or using the confidential information.

California employers and employees need to know their rights

It is essential for employers and employees in California to know and understand their rights when it comes to non-compete agreements and nondisclosure agreements. The laws protecting free competition and the ability of an individual to work leave room for protecting the legitimate business interests of employers in proprietary and confidential data and property. An employment and business law attorney can offer advice and guidance.

We would be pleased to consult with you on noncompete agreements. Please contact FMG today so we can assist you with your questions.